How to refinance your mortgage for travel.
While funding a holiday may not be the most traditional motivation to refinance your mortgage, some borrowers consider refinancing at a lower rate to help manage their holiday debt.
If you're planning to take a personal loan to cover the expense of a holiday, one option is to refinance your home loan at a lower rate and use the cost-savings to help cover the cost of a trip. However, this should be carefully considered because failing to plan how you'll repay the holiday debt after it's rolled into your mortgage can increase your interest charges and repayments.
Keep in mind that adding holiday or car debt to your mortgage can put your home at increased risk and it can also harm your refinance application.
Let's look at the below example to understand the risks of refinancing to help manage travel debt.
Dan and Emma’s trip to Thailand
Dan and Emma have a $400,000 home loan and through their efforts over the last five years, they now owe $360,000. With an interest rate of 5.5%, their repayments are $2,456.35 per month.
Dan and Emma haven't been overseas for years, so they decide to book an extended trip to Thailand for $20,000. With a lack of savings to fund the trip, they're thinking about refinancing with another lender for a 20-year home loan with a lower interest rate of 5.25%. They also consider increasing the loan amount to $390,000 and adding an extra $10,000 to help fund a future renovation.
The new home loan, even with the lower interest rate would increase their monthly repayments to $2,627.99. Due to the total interest charges, this would turn their $20,000 holiday and $10,000 for additional purchases into a combined debt of $48,516.
Dan and Emma decide to speak to a financial planner and a mortgage broker before going ahead with the refinance.
Refinancing the right way
If you're thinking of switching lenders to fund a holiday, make sure you only borrow the amount that you need for the trip. For instance, in the case study above, if Dan and Emma started a repayment schedule and borrowed only the amount they needed for the trip (and didn't get tempted to borrow extra for the renovation), then the refinance could have made financial sense.
If they refinanced to $380,000 at 5.25% for 20 years, this would make their repayments $2,560.61 a month - just over $100 more than their regular repayments.
At 5.25% for 20 years the $20,000 amount would cost $12,344.52 in interest with lower monthly repayments of $134.77.
If Dan and Emma had borrowed the $20,000 at personal loan rates of say 14.5% over five years this would cost them $8,234 in interest, with repayments of $471 a month.
If Dan and Emma added this $471 a month to their loan repayments, this would mean it would take them four years to pay off this amount and would cost them $2,105.05 in interest.
$471 a month is a lot of money, especially if they are already paying a mortgage.
Say they instead added approximately $300 onto their loan per month ($75 a week), this would add only $3,780.04 in interest to the loan and would take the couple a touch under seven years to pay off.
What to watch out for
Keep in mind this example doesn't include the property value of Dan and Emma's home, so the important role equity has in refinancing shouldn't be overlooked.
It's important to note that some lenders will automatically set your new refinanced loan to a new 25 or 30 year loan. If you've paid your loan down then you may want to consider the effect this will have on the overall interest you'll pay.
Watch the video below by Heidi Armstrong of State Custodians Mortgage Company to find out more.
Refinancing home loan options